Combined behavioral and traditional finance theories in the decision-making: Basis for efficient strategic formulation for food merchandising business in Manila 6

Undergraduate Thesis: (BSBA major in Financial Management) - Pamantasan ng Lungsod ng Maynila, 2023 56

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ABSTRACT: This thesis entitled, Combined Behavioral and Traditional Finance Theories in Decision-making: Basis for Efficient Strategic Formulation for Food Merchandising Businesses in Manila was prepared by MA. ANGELICA GRACIEL S. OMUGTONG, JULIANA MARIE T. REQUERO, KURTNEY GWEN T. ZAMORA, CARL SEBASTIAN L. PATAGNAN, KRISTINE CASANDRA P. CLORES, and JOVEILA LEE M. NAVARRO, in partial fulfilment of the requirements for the degree in Bachelor of Science in Business Administration major in Financial Management. This was prepared under the supervision of Dr. Antonio Casurao Sr. This study is based on the theories of Richard Thaler, Amos Tversky, Daniel Kahneman who developed behavioral finance theories and Harry Markowitz along with William Sharpe and Merton Miller who developed traditional finance theories. These theories are applied in decision-making particularly in investment, financing and budgeting decisions, and are used to identify the basis for efficient strategic formulation that will enhance the financial performance of the Food Merchandising Businesses in Manila. Specifically, the study aims to provide information about the variables under behavioral finance particularly Overconfidence, Heuristic, Mental Accounting, Framing, and Regret Aversion Bias; variables under traditional finance theories particularly Classical Decision Theory, Risk and Return, Utility Theory, Capital Structure Theory, and Budget Model; the extent of behavioral and traditional finance theories manifesting in the actions of the financial managers; the influence of these theories in the decision-making particularly in investment, financing and budgeting of the business operation; if the application of the combined theories in the decision-making are efficient in the financial performance in terms of liquidity, profitability, solvency and efficiency; and identification of behavioral and traditional finance theories that can be applied in the financial strategic formulation. Descriptive analysis and inferential analysis statistics have been employed in completing study. Data were analysed using mean, standard deviation, frequency, percentage, ratios in financial analysis, simple linear regression analysis, and multiple linear region analysis. The study has found out that the demographic profile of the respondents consists of financial managers that have substantial knowledge and expertise in their field. Consequently, their represented entities revealed that a significant portion of the sample consists of small to medium experienced entities as well. Moreover, the study has found out that the Behavioral Finance Theories are indeed manifesting in the actions of the respondents especially in terms of Investing Decision. To be particular, the behavioral finance theory that has the most influence to the financial decision making of the financial managers is the Regret Aversion Bias by which it pertains to the behavior of decision makers considering the option or decision that will provide them the least regret. Additionally, it has also been found out that traditional finance has an influence on the decision making of financial managers especially in the aspect of Investment Decision as well. The Concept of Utility Theory has the most influence among all the mentioned variables in Traditional Finance by which it focuses on the idea of making a decision that is based on what and where customers will feel satisfied. It is reflected in the paper that the reason behind why Investment Decisions is the main financial decision being influenced by Behavioral and Traditional Finance is because financing and budgeting decisions more likely considers other factors. Both of these decisions are also being influenced by traditional and behavioral finance theories, but it is not to the same extent with Investment Decision. All in all, both traditional and behavioral finance theories are manifesting in the actions of the respondents, thus, the need of balancing out these theories in their decisions arises. Finally, this study, with the use of inferential statistics using simple linear regression analysis was able to know the efficiency of the combined behavioral and traditional finance theories in terms of the financial performance of the entities particularly liquidity, profitability, solvency, and efficiency. These were used to recommend if the combination of these theories were reliable rather than using either of finance theories alone. Furthermore, using multiple linear regression analysis was able to identify the predators that will enhance the financial performance of the entities. The findings of the study were then used as a basis for strategic planning aimed at improving the financial performance of Food Merchandising Businesses. To improve the liquidity performance of the entities, approaches including Heuristics, Framing, Mental Accounting, and Regret Aversion should be used. To increase profitability, approaches like Heuristics, Mental Accounting, Utility theory, Capital Structure, and Budget Model were recommended to apply. In order to increase efficiency, Heuristics, Mental Accounting, and Regret Aversion should be used, while Heuristics should be used to increase solvency.

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